TaxTMI 
TaxTMI 
2013 (9) TMI 444
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....thin the HSBC group spread over many parts of the world such as UK,USA, Middle East etc. The assessee being a captive service provider assumes limited risk and is remunerated on a full time equivalent basis for services rendered to the AEs. 3. For the asst. year under consideration the assessee filed its return of income declaring income of Rs.1,20,24,573. During the financial year relevant to the asst. year under dispute, the assessee earned total revenue of Rs.138,76,10,993 from international transactions with its AEs out of which Rs.120,93,71,928/- was on account of back office and call centre services and the rest of it was towards reimbursement of expenses. For the purpose of establishing that the price charged by it for the international transaction is within arm's length, assessee undertook a transfer pricing study. In the TP study the assessee adopted transaction Net Margin Method (TNMM) as the most appropriate method and selected operating profit to total cost as the profit level indicator (PLI) for determining ALP. For the purpose of comparability analysis the assessee selected eleven companies as comparables having average arithmetic mean of 10.02%. The assessee 's OP....
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....gs - Rs.1,16,91,757 The assessee preferred an appeal against the assessment order passed before the CIT (A). The assessee objecting to certain comparables selected by the TPO contended that they cannot be treated as comparables as they are having related party transactions. When assessee's objection was brought to the notice of the TPO, he accepted the fact that M/s Infotech Ltd., and M/s Datamatics Technologies Ltd., did have substantial related party transactions. After further deliberation before the first appellate authority, the TPO submitted a final list of comparables including four companies which are as under:- S. No. Comparable Company OP/TC% Sales (Rs. in cores) 1 Wipro BPO Solutions 34.13% 194.23 2 MCS Ltd. 6.56% 23.70 3 Fortune Information Technology Ltd. 87.80 14.01 4 Vishal Information Technology Ltd. 20.77 13.72 Arithmetic Mean (Average) 37.31 30.37 6. The CIT (A) rejected Fortune InfoTech Ltd on account of abnormally high rate of profit earned by it at 87%. The CIT (A) also excluded MCS Ltd., as profit shown by it at 6.56% falls below the normal profit range of the BPO Sector in fi....
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.... Income-tax Appellate Tribunal, Hyderabad Benches:- Brigade Global Services Pvt. Ltd. ITA No.1949/Hyd/2010 and ITA No.988/Hyd/2011 M/s. Capital IQ Information Systems - ITA No. 1961/Hyd/2011 Market Tools Research Pvt. Ltd. - ITA No.2066/Hyd/2011 10. The learned departmental representative however contended that there is no valid reason to exclude Vishal Information Technologies from the list of comparables. 11. We have considered contentions of the parties and perused the material on record with regard to the aforesaid comparables. There is no dispute to the fact that the employees cost to total turnover of the aforesaid company works out to 1.42% as against the industry average of 30 to 40% and assessee's employees cost to turnover percentage of 43.76%. This fact implies that the aforesaid company has outsourced major portion of its work to third party vendors. Therefore, this company cannot be treated as a comparable by applying the ratio laid down by the co-ordinate bench in case of Brigade Global Services (P.) Ltd. (supra) and Capital IQ Information Systems (India) (P.) Ltd. (supra) while directing exclusion of the aforesaid company. In this view of the matter, w....
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....is equally high compared to the turnover of Wipro BPO. He submitted that the CIT (A) has given valid reasons for selecting this company as a comparables. 14. We have heard rival submissions of the parties and perused the material on record. Assessee's contention that Wipro BPO is not comparable because of its size is not acceptable as the assessee itself is also having an equally high turnover. However, so far as assessee's contention that this company cannot be considered as a comparable because of related party transaction requires to be considered. The CIT (A) has not properly considered the objections of the assessee in this regard. It is also a fact that the TPO has not considered this company in the TP order, hence he has no occasion to look into this aspect. Further, we also find some force in the contention of the learned authorised representative of the assessee that element of depreciation distorts comparability while comparing the net profit of the comparables. This bench of the Tribunal in case of Qual Core Logic Ltd. (supra) while considering this particular issue has held as under:- "We have heard both the parties on this and perused the....
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....on nature of plant/machinery and year of use. Obviously there are differences between the machinery employed by the taxpayer and other comparable concerns which is reflected in amount and percentage of depreciation claimed. How this variation and difference could be ignored under TP Regulations is neither shown nor explained. The assessee has debited high amount/ratio of depreciation. Other enterprises have claimed depreciation at much lower amounts. Size of the assets besides the age of the assets of comparables was leading to difference in the profit margins and in mean margin. On the contrary, claim of depreciation is eating up large chunk of profit in the case of the taxpayer. The CIT(A) has not said a word on "asset" employed and "risks" suffered by the tested party and the comparables. Thus, material differences needing suitable adjustment were ignored and a flawed analysis was carried even in appellate proceedings. Without considering obvious material differences, the contention of the assessee to take profit without depreciation was rejected. This rejection is not sound in law. This ground is allowed. Accordingly, we direct the Assessing Officer to recompute the ALP." Th....
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.... excluding the aforesaid company. The CIT (A) has not said whether the aforesaid company is functionally different or does not fulfil any other criteria so as not to be treated as a comparable. Considering the totality of the facts and circumstances, we deem it proper to restore the matter to the Assessing Officer/TPO to re-examine afresh the functionality of this company after considering the submissions of the assessee and thereafter decide acceptability or otherwise of the aforesaid company. 18. It will be pertinent to mention here that the learned authorised representative of the assessee has also made an alternative submission that, if at all any adjustment has to be made, the same shall be on the average of Wipro BPO and MCS Ltd on PBDIT. The assessee has submitted a computation demonstrating that the average PBDIT of Wipro BPO and MCS Ltd works out to 12.97% as compared to assessee's PBDIT of 22.14%. The work out made by the assessee is reproduced below:- "PBDIT Margin Calculations Wipro HDPI Income 1,973,427,556 1,221,054,850 Profit for the year Add: 459,979,396 64,900,487 Depreciation 174,015,728 202,339,364 ....
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....has established a facility for carrying on the BPO business and large portion of facility is underutilized during the year. The assessee bills its AE based on the utilisation i.e., full time equivalent. The billing pattern is that per employee for the month will be billed at agreed rate on the extent of unutilised capacity the assessee has not earned any income. He submitted that the financial statements of the assessee does not bifurcate the cost incurred for providing service to its AE and the cost involved in underutilisation or idle capacity. He further submitted that since the assessee works on three shifts and 24X7 round the year basis it has sought adjustment on determination of the cost incurred due to underutilisation. It was submitted that though sufficient data was available to determine the cost of idle capacity the TPO and the CIT (A) without properly considering them have held that the data is not sufficient. It was further submitted that the issue with regard to idle capacity may be settled by following principle of absorption costing which is an established principle universally known and offers a reliable solution without any confusion. He further submitted that th....
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....em pertain to any legal issue but, relates to issue of transfer pricing adjustment. The aforesaid appeal has been filed by the department on 5-4-2007. Thereafter, the appeal has been adjourned from time to time and after lapse of three years, the department chose to raise the additional grounds. The department has also not shown any valid reason explaining why such grounds were not taken at the time of filing the appeal and why they are being taken at such a belated stage. As has been held by the Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383, it is the discretion of the Tribunal whether to allow or not to allow a new ground. It is further held by the Hon'ble Supreme Court that where the Tribunal is required to consider only a question of law arising from the facts which are on record in the assessment proceedings then the Tribunal can consider such legal issues. However, in the facts of the present case, the additional grounds raised are not on legal issues but issues relating to matters which requires going into fresh facts. In aforesaid view of the matter, we are not inclined to admit the additional ground raised by the department. ....